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Optimal fiscal policies in an economy with externalities from public spending

Listed author(s):
  • Chia-Hui Lu

    ()

This paper examines the optimal fiscal policies in an economy with externalities from government expenditure. We extend Lucas (Oxf Econ Pap 42:293–316, 1990 ) two-sector endogenous growth model and consider the spillover effects from the public spending on infrastructure and education. We compare the optimal fiscal policies derived from the Ramsey allocation problem with those in the centrally-planned economy. The results of this paper are as follows. First, the optimal share of public spending on infrastructure is smaller than its relative contribution in the production function. Next, the optimal share of public spending on education is smaller than its relative contribution in the accumulation of human capital, and does not affect the tax rate of capital income. Finally, the optimal tax rate of capital income is positive if the externality from public productive spending exists. Copyright Springer-Verlag Wien 2015

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File URL: http://hdl.handle.net/10.1007/s00712-015-0433-9
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Article provided by Springer in its journal Journal of Economics.

Volume (Year): 116 (2015)
Issue (Month): 3 (November)
Pages: 211-228

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Handle: RePEc:kap:jeczfn:v:116:y:2015:i:3:p:211-228
DOI: 10.1007/s00712-015-0433-9
Contact details of provider: Web page: http://www.springer.com

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  1. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
  2. William F. Blankenau & Nicole B. Simpson & Marc Tomljanovich, 2007. "Public Education Expenditures, Taxation, and Growth: Linking Data to Theory," American Economic Review, American Economic Association, vol. 97(2), pages 393-397, May.
  3. Pierre‐Richard Agénor, 2011. "Schooling and Public Capital in a Model of Endogenous Growth," Economica, London School of Economics and Political Science, vol. 78(309), pages 108-132, January.
  4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
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  6. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  7. Antonio Ladrón-de-Guevara & Salvador Ortigueira & Manuel S. Santos, 1999. "A Two-Sector Model of Endogenous Growth with Leisure," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 609-631.
  8. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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  10. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  11. Konstantinos Angelopoulos & James Malley & Apostolis Philippopoulos, 2012. "Tax structure, growth, and welfare in the UK," Oxford Economic Papers, Oxford University Press, vol. 64(2), pages 237-258, April.
  12. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
  13. Gerhard Glomm & B. Ravikumar, 1998. "Flat-Rate Taxes, Government Spending on Education, and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 306-325, January.
  14. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
  15. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
  16. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-834, August.
  17. Pantelis Kalaitzidakis & Vangelis Tzouvelekas, 2011. "On the growth and welfare maximizing allocation of public investment," Journal of Economics, Springer, vol. 104(2), pages 127-137, October.
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